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Morningstar | Slowing Revenue Growth for U.S. Bancorp; Expense Control and Overall Profitability Still Solid

Wide-moat U.S. Bancorp reported decent first-quarter results that fit within our expectations. Many of the themes of U.S. Bancorp’s earnings were similar to those we have seen for other U.S. banks. Revenue growth is slowing, net interest margin expansion is essentially over, but expense control and share buybacks are still leading to decent earnings per share growth while returns on equity remain solid. Revenue was up 2%, while expenses were up only 1%, leading to EPS growth of 4%. U.S. Bancorp maintained its top-tier levels for return on average assets, coming in at 1.5% while return on tangible common equity was 18.4%. We do not expect to make any material changes to our fair value estimate of $52 per share.

Overall, U.S. Bancorp continues to maintain its industry-leading returns on tangible equity, but the bank is likely reaching its full potential here, and we do not project any material expansion in the future. If anything, as the credit cycle normalizes, returns could be pressured. Even so, this positions the bank as a consistent top performer in the industry.

Average loans growth picked up slightly in the quarter, up 2.4%, and excluding FDIC-covered loan sales, growth was 3.7%. This was driven by broad based growth, coming from mortgages, commercial, and cards. Average deposit levels were roughly flat, and deposit balances continued to shift toward interest-bearing accounts. Credit costs crept up ever so slightly again, but this was largely due to loan growth as the PCL ratio and the ratio of nonperforming assets remained stable.

Net interest margins were up 1 basis point compared with fourth-quarter 2018, and management admitted during the call that NIMs will likely be stable for the foreseeable future. Noninterest income was up 1%, and we wouldn’t be surprised to see this pick up for the rest of the year. Corporate payment products and merchant processing growth have returned back to their mid-single-digit ranges, and we should see some pick up in mortgage-related revenue given the latest yield curve developments. Few to no rate hikes should also ease up pressure on the service charge line item. Expenses remained well controlled, up only 1%. Management highlighted its latest technology investments, which have led to more digital engagement and consistent increases in digitally based sales. We like that the bank is investing in technology for the future, and the continued efficiency gains from the shift to digital should enable consistent expense control.